The Customer Price Index (CPI) has been used in Australia since the 1960s, but you might have heard the term thrown around more in recent months – and that’s because of ‘cossie livs’.
The CPI is the most widely used measure of inflation and is often called a cost-of-living index. CPI has an impact on your personal finances, because when inflation gets too high, we can expect rate hikes to curb spending.
Here, COBA’s Chief Economic Advisor Nicki Hutley breaks down what CPI is, how it is used and how it impacts most Australians.
Understanding the CPI
Inflation measures the pace at which prices of goods are rising. Very rarely, average price levels fall, and this is known as deflation.
There are many ways of measuring inflation, but the most common one that gets reported in the media is the Consumer Price Index, or CPI. The CPI is particularly important, because it is the one that the Reserve Bank of Australia watches when it is working out whether to increase or decrease interest rates. Rising inflation usually means higher mortgage rates. The CPI looks at hundreds of different goods that an average household spends their money on. The main groups of goods are shown in the table below.
| Group | Examples |
| Food and non-alcoholic beverages | Bread, milk, vegetables, cakes, meat, fish, oils, eggs, jams. Also includes restaurants and take away meals |
| Alcohol and tobacco | Beer, wine, cigarettes |
| Clothing and footwear | Footwear and clothing, for men, women and children as well as accessories |
| Housing | Rents, new dwellings, water, gas and electricity |
| Furnishings, household equipment and services | Carpets, curtains, cushion, appliances, glasses, cutlery and tools, hairdressers, child care |
| Health | Doctors and dentists and medical products |
| Transport | Cars and parts, petrol, maintenance, public transport fares |
| Communication | Postal and phone services and equipment |
| Recreation and culture | Books, newspapers, computers, holidays, games and toys |
| Education | Pre-school, school and uni/TAFE fees |
| Insurance and financial services | Insurances (car, home etc), bank fees |
Is cost of living going up faster than CPI?
The CPI is measured quarterly with the inflation data published by the Australian Bureau of Statistics (ABS). The latest release was on 24 April, which showed that CPI rose 1.0% in the latest quarter (over the 12 months to the March quarter, CPI rose 3.6%).
Sometimes, it feels like the cost of living is going up much faster than the CPI. That’s because we tend to focus on the things that are going up a lot, like energy bills or petrol, for example. But these make up only a small portion of our total spending. You may be surprised to know that the average household only spends about 3% of income on energy bills. But this jumps to more than 6% for those in the lowest 20% of earners. The exception to this is rent, which has been rising much faster than average prices in most cities.
Where in the country is inflation lowest?
The CPI also looks at changes in different capital cities (regions are excluded for a number of reasons, mainly because it’s harder to collect that information and the majority of Australians live in capital cities). In March this year, inflation was lowest in Hobart at 3.1%, and highest in Adelaide, at 4.3%. The average for all cities was 3.6%. So inflation can feel very different depending on what we are buying and where we live.
While it may not feel like it, prices of some goods do go down from time to time. But most of the time, there are enough price increases that, even when there are sales and bargains overall, we are paying more for our goods and services.
Why RBA keeps an eye on inflation
High inflation is not good for households or businesses. When inflation is high, consumers’ purchasing power is reduced, which means they can afford less goods and services – which is detrimental for businesses.
That is why the Reserve Bank has a target for inflation of 2% to 3%. It can drift a little higher for a short period of time, but when it gets too high, as it did at the end of 2021, then the Bank uses higher interest rates to stop people spending. This in turn makes it more difficult for businesses to put up prices.
At the moment, however, some of the things making prices higher – energy, insurance and rents – can’t be fixed by higher interest rates. This makes the Bank’s job a lot more difficult.
The Bank has forecast that inflation will return to its target later next year (2025).
The next CPI release is 31 July, when inflation data for the June quarter will be released.